Question

Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2:

	Dec. Year 1	Jan. Year 2	Feb. Year 2	Mar. Year 2
	(Actual)	(Budgeted)	(Budgeted)	(Budgeted)
Cost of goods sold	$80,000	$140,000	$170,000	$120,000

Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in January Year 2 would be:


Select one:

a. $147,500

b. $180,000

c. $165,000

d. $137,500

Company expects the following total sales:
  

Month	Sales
March	$30,000
April	$20,000
May	$25,000
June	$25,000

The company expects 60% of its sales to be credit sales and 40% for cash. Credit sales are collected as follows: 30% in the month of sale, 70% in the month following the sale. The budgeted accounts receivable balance on May 31 is:

Select one:

a. $12,600

b. $15,000

c. $20,400

d. $10,500

Answer 1

1. Option A ($147,500)

Cost of goods sold = Opening stock + Purchases - Closing stock.

This month opening stock = previous month closing stock.

This month closing stock = 25% of the following month's projected cost of goods sold.

Opening stock of Jan. Year 2 = Closing stock of Dec. Year 1

= 25% of $140,000

= $35,000

Closing stock of Jan. Year 2 = Opening stock of Feb. Year 2

= 25% of $170,000

= $42,500

Cost of goods sold = Opening stock + Purchases - Closing stock

$140,000 = $35,000 + Purchases - $42,500

Purchases = $140,000 + $42,500 - $35,000

Purchases = $147,500

(2) Option D ($10,500)

Credit sales for the month of May = $25,000 * 60% = $15,000

Out of this 30% is received in the month of may and remaining 70% in the month of June.

Therefore, accounts receivable balance on May 31 = $15,000 * 70% = $10,500